A little perspective on the South African market

I’m sure that many of you know the story about the very successful lawyer who bought a brand-new car and decided to park it right in front of his office for all his colleagues to see one morning. While he was getting out, however, a massive truck passed too close to the curb and tore the car door on the driver’s side right off. Luckily, a policeman was close by and witnessed the whole ordeal. He immediately parked behind the car and switched on his emergency lights. Before the policeman could say a word, the lawyer started screaming about how his brand-new car, which he had just picked up the day before, was now completely ruined and that no matter what the panel beaters do, it would never be the same again.

After the lawyer finally managed to collect himself, the policeman shook his head in shock and awe and said to the lawyer: “I can’t believe how materialistic you are. You are so focused on your possessions that you still haven’t realised that your right arm was torn off along with the car door!” “Oh my gosh!” the lawyer replied, “My Rolex!”

You may wonder what on earth this has to do with anything, right? Well, it’s all about perspective. As South Africans, I think many of us feel just like the lawyer whose car door has been ripped off by the rest of the world from both an economic and investment perspective. You also don’t have to take an overseas trip to know that your rands can no longer buy what it could buy five years ago.

When looking at our local stock market, we only seem to see more of the same. Over the last five years (up to the end of August 2018) we experienced 7.6% growth per year in the FTSE All World Index in US$ terms. Over the same period, the FTSE/JSE All Share Index grew by 10% per year in rand terms. But comparing these two would be a lot like thinking that the lawyer acted rationally over losing his watch, after losing his entire arm. Only when we convert our local growth into US$, do we gain some proper perspective. In reality, the South African market has declined by 0.6% per year over the last five years in US$ terms.

But what went wrong? A mere decade ago, famous investment experts like Mark Mobius claimed that emerging markets (including South Africa) offered the best investment potential. Were they wrong or did things just change so much that this is no longer true?

The short answer is that they definitely weren’t wrong, but in order to prove my point, we need to have a look at the reasons why investors like Mobius invested in emerging markets in the first place. In my opinion, the definition of emerging markets holds the key. According to Investopedia.com, emerging markets are so popular amongst investors because they offer the prospects of higher returns due to the fact that they often experience faster economic growth, as measured by their gross domestic product (GDP). Obviously, this higher-than-expected growth also comes with much higher risks due to emerging markets’ political instability, problems with infrastructure, volatile currencies and limited stock options.

A decade ago, when everyone was still smitten by emerging countries, the South African economy was still healthy. The South African GDP grew roughly 3% faster per year compared to the G7 largest countries in the world’s annual GDP between 2005 and 2009. This made it worthwhile for huge investors to face these risks in favour of the possibility of higher returns. Since then, this growth gap has steadily decreased and South Africa’s economic growth has slowed down to such an extent that it’s now even slower than some of the much older established and developed countries.

This means that despite it’s strong underperformance, South African shares, when compared to developed markets, still won’t encourage larger international investors to look for bargains in the South African market.

But don’t lose perspective. As an emerging country, we play a very small role in a very large investment world and we can’t take all the blame for the slow-down in economic growth locally. All that the data above shows us, is what went wrong, and past performance definitely doesn’t guarantee future performance. I really do believe that things will eventually improve. In the words of Morgan Housel (Getting Rich vs. Staying Rich): “Nothing great or terrible is likely to stay that way for long, because the same forces that cause things to be great or terrible also plant the seeds to push them the other way.”

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained herein. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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